Scott Paper Unit Draws $1.6 Billion

By SETH FAISON

Published: October 11, 1994

Sappi Ltd. of Johannesburg and two other investors agreed to buy America's largest maker of glossy paper from the Scott Paper Company for $1.6 billion, the companies said yesterday. Executives said it would be the biggest American investment by a South African company in more than 20 years.

For Sappi, South Africa's leading paper and forest products company, the purchase represents a big leap into the world paper market. Sappi's sales totaled $1.7 billion last year, while the manufacturer it is acquiring, the S. D. Warren Company of Boston, sold $1.2 billion.

For Scott Paper, the sale of S. D. Warren is a sizable step in efforts by its chief executive, Albert J. Dunlap, to reduce the size of the company, its debt and the diversity of its interests.

"It was a strategic sale for us, and a strategic buy for them," said Mr. Dunlap, a turnaround specialist who came out of retirement in April to run Scott. "I've always been a great believer in sticking to your core business."

Sappi's core business, while limited to paper products, has expanded substantially in recent years. In 1988, it bought the world's largest producer of dissolving pulp from a British conglomerate, and in 1990 it bought five paper mills in Britain.

Sappi would not have been legally barred from investing in the United States during the period of international economic sanctions, which were aimed mostly at discouraging American investment in South Africa and not the other way around. But executives involved in Sappi's purchase said it would have been difficult as little as two years ago.

"Think of how the press might have looked at a South African company coming in," said John Chalsty, chief executive of Donaldson, Lufkin & Jenrette, who was born in South Africa and immigrated to the United States in 1954. "At this time, the issue never arose."

Donaldson, Lufkin & Jenrette is both a new owner and a lender in the sale of Warren. Its investment banking unit, DLJ Merchant Banking Partners, bought $125 million in equity, and another DLJ subsidiary provided $375 million in a bridge loan. The UBS Capital Corporation, a private investment arm of Union Bank of Switzerland, is also providing $25 million in equity.

Under the terms of the purchase, which is subject to approval by the South African Reserve Bank and is not expected to be completed before December, Sappi would own about 70 percent of the company; DLJ Merchant Banking Partners would hold 25 percent and UBS Capital would own about 5 percent.

Chemical Bank provided the bulk of the deal's financing, with a guarantee of $1.1 billion, executives said. Because of strict limits on the amount of capital a South African company can remove from that country, Sappi needed an additional $200 million loan from Union Bank of Switzerland to cover its equity investment.

Analysts who follow Scott Paper said that the sale of its glossy paper manufacturer was expected, but that it had been unclear whether Scott could find a buyer for its price tag of $1.6 billion, about equal to Warren's book value. The International Paper Company and the Union Camp Corporation each expressed interest initially, but dropped out because the price was too high for them, analysts said.

"It's interesting to me that the two big sales by paper companies in the past month have each been with foreign buyers," Lawrence Ross, an analyst at Paine Webber, said.

Last week, Reed Elsevier P.L.C. bought the Mead Corporation's on-line information service for $1.5 billion. "Maybe that tells you something about the value of the dollar," Mr. Ross said.

Mr. Ross noted that Scott Paper bought S. D. Warren in 1968 to diversify its holdings at a time when competition from other large rivals in the tissue business was growing. "They never really wanted Warren," he Ross said. "They made the best of it, but it was never really what they wanted."

S. D. Warren produces about 25 percent of the glossy paper -- used in magazines, brochures and catalogues -- sold in the United States. It runs four paper mills, two in Maine, one in Michigan and one in Alabama.

Another analyst said that a complication in the sale arose from the plant in Mobile, Ala., where pulp production will still be owned by Scott, separate from Warren. With a new owner, Warren will have to buy pulp from Scott at a market price.

"It's sort of like selling the sports department of your newspaper while you keep the rest," said the analyst, who spoke on the condition of anonymity. Mr. Dunlap said he did not think the split would be problem.

"We worked it out amicably," he said. "This is a very large sale."

Mr. Chalsty of Donaldson, Lufkin & Jenrette said he believed the sale was the largest investment ever made in the United States by a South African company, and was certainly the largest in the last 20 years.